Saturday, November 27, 2010

How to Improve Dodd-Frank

Oliver Hart and Luigi Zingales have a suggestion about how to improve the financial reform law. Their goal is to "spare the most vibrant financial institutions from the rigidities and bureaucratization that a strict application of the Dodd-Frank bill would entail."

Wednesday, November 24, 2010

Barro on QE2

Tuesday, November 23, 2010

Brad DeLong objects to my recent NY Times column by displaying some Tax Policy Center data that, he says, shows the Bowles-Simpson tax plan is hard on the poor and easy on the rich. Progressives, he concludes, should oppose the plan.

The problem, however, is the benchmark used in this particular table: current law as of 2015. Under current law, all of the Bush tax cuts expire, and millions of new taxpayers are hit by the AMT. That is an outcome that has never been in effect and that neither political party endorses. It is an artifact of legislative history.

A better benchmark, as noted by Howard Gleckman of the Tax Policy Center, is current policy. Here are those results. The implication is exactly the opposite. All income groups take a hit, particularly those at the top of the distribution.

Saturday, November 20, 2010

Taxes, Spending, and Semantics

Friday, November 19, 2010

The Progressivity of Bowles-Simpson

The Tax Policy Center has taken a preliminary look at one version of the tax plan offered by Erskine Bowles and Alan Simpson. And Paul Krugman & friends can rest easy. The Bowles-Simpson proposal is indeed an across-the-board tax increase-- and a fairly progressive one at that. In 2015, the lowest earners would face an average cut in their after-tax income of 3.4 percent or about $400. Middle-income households (those earning an average of about $60,000) would see their after-tax incomes fall by 4 percent or about $1,900. On the other end of the economic food chain, the top one percent of earners (who earn an average of about $2 million) would lose about $77,000 (5.3 percent) while the top 0.1 percent would see their after-tax incomes cut by nearly 8 percent, or close to $500,000.

The TPC estimate comes with a number of caveats. It assumes essentially the law we had in 2009. The 2001 and 2003 tax cuts still apply in 2015, about 25 million middle-income households continue to be protected from the Alternative Minimum Tax, and the 2009 estate tax is back on the books. Given political realities these days, that guess is a good as any, but it is a guess....

The TPC estimate is also static, thus it assumes no behavioral response to the proposed tax law changes. However, thanks to lower marginal rates and the smaller deficit in the overall plan, the economy could grow faster than the co-chairs predict and generate more tax revenue....

Thus, Bowles and Simpson have a clear goal: They want to raise taxes across the board while lowering rates. And TPC’s preliminary projections suggest that’s pretty much what they’d do.

Wednesday, November 17, 2010

QE2

Several people have asked my opinion of the Federal Reserve's new round of quantitative easing. In particular, some have noted that I did not sign the open letter by conservative economists critical of recent Fed actions.

My view is that QE2 is a modestly good idea. I say it is a "good idea" because, like Ben Bernanke, I am more worried at the moment about Japanese-style deflation and stagnation than I am about excessive inflation. By lowering long-term real interest rates below where they otherwise would be, QE2 should help expand aggregate demand. I include the modifier "modestly" because I don't expect these actions to have a very large effect.

Moreover, I do see some potential downsides. In particular, the Fed is making its portfolio riskier. By borrowing short and investing long, the Fed is in some ways becoming the hedge fund of last resort. If future events require higher interest rates, the Fed will end up making losses on its portfolio. And even if doesn't recognize these losses (by not marking to market), it could end up paying more interest on newly expanded reserves than it is earning on its newly acquired portfolio of long bonds. Such a cash-flow deficit could potentially undermine the Fed's political independence (which is already not very popular in some circles). Yet if the Fed tries to avoid these losses by failing to raise rates when needed, inflation could indeed become a problem down the road. I trust the team at the Fed enough to think they will avoid that mistake.

So, in the end, I judge QE2 to be a small but risky step in the right direction.

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Addendum: While I do not agree with its conclusion, I did find this video on QE2 amusing.

Hubbard on the Bowles-Simpson Tax Plan

Sunday, November 14, 2010

You Fix the Federal Budget

Saturday, November 13, 2010

Help me find the photographer

The above picture, taken in the midst of the Zimbabwe hyperinflation and posted around the internet, illustrates well how fiat money can become nearly worthless when the central bank creates too much of it. I was hoping to put the photo in the next edition of my textbook, but my publisher is having trouble locating the photographer from whom to obtain reprint permission. If you are photographer, or know his name and contact information, or have a similar picture for which you hold copyright, please contact me.

Tuesday, November 02, 2010

Is Obama a Keynesian?

Monday, November 01, 2010

From Saturday's DC Rally

About Me

I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.